In case you haven’t noticed, there’s a major reallocation of wealth coming due if President Joseph Biden gets his $3 trillion spend through the Congress. As Everett Dirksen used to say, “This is a lot of money” even for a $20 trillion GDP economy. It comes on top of $2 trillion just structured into our setting. Who knows what pay-back will come from such largesse in outer years? Will this stimulus yield rising tax receipts from corporations and individuals? Consider, corporate income tax rates for decades followed a downward path, not just from Trump’s hand. Early postwar years, the corporate tax rate topped out at near 70%, then sloped downward to 20% recently. I’d like to see it back to 30% which still was lower than the 50-year trajectory. It might impact stock buybacks, but so what? No corporation is likely to schmeiss capital spending which is based on discounted cash flow projections on newly-invested capital.
Don’t cry for me, Argentina!
Politicians are not good at projecting unintended consequences from their acts. There will be a major relocation of wealth in the country thereby shielding it from the tax man. Over 60 years, I’ve paid my share in capital gains taxes. Bill Gates and Jeff Bezos can be taxed on hundreds of billions in unrealized gains. Warren Buffett, too. Why no tax on stock transactions? It’s missing from the Biden tax agenda. Won’t disturb serious long-term investors, just traders and arbs. GameStop (NYSE:GME) players may blink, but it won’t stop their day trading. Ways to raise tax receipts barring the attack on personal wealth? When I subwayed down to Wall Street going back 60 years, commissions on stock trades averaged 1% on a round lot of 100 shares with no volumetric break. An active day’s trading currently can run to 700 million shares. In 1959, 4 million shares was the norm. I’d like to see an activity tax on trading that could raise $20 billion per annum. Let the Street scream bloody murder. Want to eliminate hundreds of billions in student loans outstanding? Implement a new domestic Peace Corps for a couple of years’ service. I can’t find any idealism attached to presently drafted tax programs contrived by economists with no heart. Where’s the press for a $15 hourly wage? Tens of millions of part-timers serve in retailing, food service and healthcare venues. Underpaid and under covered for healthcare. Easily terminated, too. They have no rights. This national disgrace goes hardly remarked upon. As yet, nobody chooses to deal with the advanced valuation structure of the market if President Biden gets his way. Economic history suggests when the government implements huge spending programs uncovered by tax receipts, in the early years, the market reacts by lowering expectations on price-earnings ratios for stocks. The bond crowd is prone to panic, too. Everyone shortens his duration on bond holdings, creating a spike in interest rates. Historically, Treasury yields can rise to 5% or higher while spreads between corporate paper and Treasuries widens by a couple of hundred basis points. For most of my 60 years as a player, I’ve endured a harsh FRB that readily panics the bond crowd and drives down price-earnings ratios for growth and value stocks.
My crash helmet stays buckled on
Even large cap technology paper plummeted from two times the S&P 500 valuation to even with this index during the tech bubble in 2000 and later in 2013-2014. Am I the only one who remembers valuation for tech houses collapsing in 2013-14? We were skeptical of shrinking gross margins and research productivity.
The year 2015, was a great buying opportunity for tech, starting with Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), up 300% or more to date. Comparing P/E ratios with long term Treasury yields shows that price earnings ratios never exceed 16 times earnings when Treasuries yield 4%. Treasuries spiking to over 5% takes stocks to 14 times earnings, even lower when they hit 6%.
When Paul Volcker decided to rid the country of its inflationary expectations in the mid-seventies, he took Treasury yields to 15%. The market sold down to 10 times earnings and book value. Currently, we’re around 20 times earnings and double book value. I remember Fed Funds spiking over 10% mid-eighties. Today we’re next to zero. I’d put its 20-year trendline closer to 4% with spikes to 6%. Even economists disparage the naïve forecast that nothing ever changes. Consider junk bond yields on weak economic signals in 2011-12 reached 9%. (Forced me to double check such a wide disparity.) I’m not particularly bearish as yet, hoping reflation massages the numbers, but the market’s reflation bet is mostly in place. Martin Sosnoff, retired, was founder, Chief Investment Officer and Chief Executive Officer of Atalanta Sosnoff Capital, LLC. His career on Wall Street spanned 60 years. Sosnoff has authored four books on money management: Train to Outslug the Market, Humble on Wall Street, Silent Investor Silent Loser, and Master Class for Investors. Martin Sosnoff and/or his managed accounts own: Microsoft and Amazon